Competing Against Overconfident CEOs

47 Pages Posted: 23 Aug 2018

See all articles by Binay Adhikari

Binay Adhikari

University of Texas Rio Grande Valley

Shradha Bindal

Texas A&M University (TAMU), Mays Business School, Department of Finance

T. Colin Campbell

University of Cincinnati - Department of Finance - Real Estate

Shane A. Johnson

Texas A&M University - Department of Finance

Date Written: August 31, 2018

Abstract

Motivated by studies that show overconfident agents are more competitive, we test whether overconfident CEOs respond differently and perform better when competition increases. Using tariff reductions as exogenous shocks to competition and a triple-difference specification on matched samples, we find that when competition increases, firms with overconfident CEOs slash their operating and gross profit margins, and increase advertising and research and development more intensively than rational CEOs do. Their actions lead to increased market share and value for their firms relative to firms led by rational CEOs. Our results imply that CEO overconfidence is beneficial when firms face increased competition.

Keywords: CEO overconfidence, competition, tariffs, firm value, market share

JEL Classification: D22, L11, G31, F14, M12

Suggested Citation

Adhikari, Binay Kumar and Bindal, Shradha and Campbell, Timothy Colin and Johnson, Shane A., Competing Against Overconfident CEOs (August 31, 2018). Available at SSRN: https://ssrn.com/abstract=3223778 or http://dx.doi.org/10.2139/ssrn.3223778

Binay Kumar Adhikari (Contact Author)

University of Texas Rio Grande Valley ( email )

1201 W University Dr
Edinburg, TX 78539
United States
9566653827 (Phone)

Shradha Bindal

Texas A&M University (TAMU), Mays Business School, Department of Finance ( email )

430 Wehner
College Station, TX 77843-4218
United States

Timothy Colin Campbell

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States

Shane A. Johnson

Texas A&M University - Department of Finance ( email )

Mays School of Business
College Station, TX 77843-4218
United States
979-862-3318 (Phone)

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